Density Makes Cities More Affordable

2012 October 29

by Alex Steffen

In the middle of this piece on the transfer of development rights (a useful approach, in which a developer pays farmers not to develop their farms into subdivisions, and is given a height bonus in return by local government, allowing him or her to build a taller building), there sits this strange quote:

“Of course, TDR is not without its critics. Many green-minded people will celebrate density until it arrives in the form of a high-rise condo next door. But this hesitation is about more than just NIMBYism: Anna Nissen, a design professional in Seattle who takes a critical eye to TDR, points out that upscale development — like Olive 8, for example — drives up property values and hastens gentrification. ‘The poor, the working class, and their employment have been bounced out of central cities that unaccountably are making matters worse by designating dizzying amounts of increased density,’ she writes in an email. ‘TDR rides aimlessly on top of all that.’”

Strange, that is, because it’s so full of cliched non-arguments, one wonders what prompted the writer to include it in an otherwise solid piece.

First there is the conflation of two separate things: density and property values. Density does not drive up property values: property values rise when there are more people who want to live in a set location than there are homes to buy. New density may make a place more desirable to live in, in which case more people may want to live there, and if demand rises more quickly than supply, home prices rise too. We know that it’s possible to create density which drives down property values (think about the awful public housing towers of the 1960s), by making a place somewhere fewer people want to live. We have a term for this well-proven process: supply and demand.

Second, there is the unchallenged hyperbole: “dizzying amounts of increased density” as if we ought to reel in vertigo at the mere thought of condo towers.

Third, we have the real problem with this quote: the claim to serve “the poor, the working class” and “their employment” who are being “bounced out of central cities.” It is true that in successful cities across North America, we’re seeing pretty rapid increases in the value of land and homes. It is also true that this means lower-income people, through no fault of their own, being forced to look to surrounding suburbs for housing, and that living in the suburbs places severe economic strain on them, due to the costs of auto-dependence. I, personally, think this is a major urban crisis.

What is categorically not true, however, is that cities’ development policies are “making matters worse” by adding density. This is a standard trope among anti-urbanists everywhere, and it’s at best a misunderstanding of reality.

Again, we have to go back to supply and demand. As long as there is more demand than supply, prices rise. There is no way around that fundamental fact of capitalism. That means, if we wish to moderate housing prices to limit displacement of lower-income citizens, we have two options: reduce demand, or increase supply.

Demand reduction, in thriving cities within nations whose populations are freely mobile, is possible only by destroying the things people love about the city. You can’t prevent people from moving to your city; you can’t stop people who live there from having kids: if your city is great, more people are going to try to live there. In many cities now, more people want to live there than there are places to live within city borders, and this problem is only going to grow as the forces driving resurgent urbanism (from climate to energy to cultural preferences for walkable neighborhoods) gain momentum.

That leaves us with supply. And this drives NIMBYs up the wall, because the simple truth is that if you want home prices to drop, or even just level off, the only way to do this is to build more housing. Every known policy aimed at limiting housing costs — from rent control to tenants’ rights to development moratoria — has failed to stop the rise in housing costs. Some of these policies have other merits for the specific tenants involved (I for one think tenants’ rights ought to be strengthened in most cities), but none can do anything about the central dynamic, which is that in a city with extreme housing pressures, almost every sale of a property drives out a lower-income family and replaces them with a higher income family: and, if that city has limited new housing supply, the lower-income family’s only option is to move out of the city to where housing is cheaper. Desirable cities in growing regions either add housing rapidly or become unaffordable to most and social inequitable. It’s that simple. Limiting housing supply is what drives out the poor.

If you want to see the extreme case of what happens when no new housing is built, and cities try to rely solely on housing laws, look at San Francisco. Their latest affordability survey found that for 25% of San Francisco homes to be affordable to those making 80% median (about $60K), the city must build 100,000 new homes. Last year? The whole city built roughly 200. The median price for a three-bedroom (i.e. family) home is now $870,000.

And this points to the hard truth here: we need to build, and build a lot. The amount of housing we need to build to address this challenge though, is often an order or orders of magnitude more than most cities have been building in recent years. To keep many cities affordable, we need policies that result in thousands, sometimes even tens of thousands, of homes built each year. This is basic economics.

There should be caveats about how we build, sure: such homes should be well-built, in buildings that participate in making better places, set in a context of walkable urbanism. Some developments suck – we should avoid building them. Some places would be difficult to improve with new building – we should avoid building in them. But every North American city has a myriad of broken places — half-abandoned commercial streets, strip-mall arterials, neighborhoods with lots of vacant lots and surface parking, and so on — and done right, lots of new housing can fix those places, and make city much better in the process. Density, used correctly, is not just how we add to our supply of housing, it’s a valuable place-making resource.

But to make use of density, we’ve got to let people build. And that demands that we move past bogus arguments against density and begin to wrestle with the realities of urban life in the here and now. It would help if journalists covering cities held anti-density statements up to the scrutiny they deserve, and didn’t just treat them as “the other side” of the story… which, after all, is sort of like quoting climate denialists to give a climate story “balance.”

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Alex Steffen is one of the world’s leading voices on sustainability, social innovation and planetary futurism. You can follow Alex on Twitter at @AlexSteffen. This post originally appeared at AlexSteffen.com.

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Photo of new multifamily housing at 901 Dexter Ave in Seattle by Dan Bertolet.

I’m pretty sure there’s research showing that density drives up economic productivity through knowledge exchange (social capital). Filling in the steps…this leads to higher incomes, which drives up willingness to pay for housing, which drives up sales prices. Prices can also be driven up by a change in the housing stock through, for example, capital investments. So, only citing the shortage or surplus of buyers is over simplistic.

Within a given physical locale, there are multiple, somewhat non-competing/non-supplemental housing markets (high-end, low-end, rental, big, small, etc). Building high-end or even middle-income units isn’t going to address low-end affordability.

If people are driven out of a city and into its suburbs, should we not presume this is because the increased costs of transportation are less than the decreased costs of housing? Or, is there a claim that people move to the suburbs only to be overly burdened by surprise transportation costs. I didn’t really understand this point in the article.

Regarding San Fran….are we sure that expanded housing supply in adjacent cities (Oakland, SJ) wouldn’t bring down SF prices? Are these not somewhat supplementary markets?

Notions and arguments about density aught to be linked to transportation in that good transportation systems can enhance as well as mimic the benefits of density. While there are clear benefits to reducing land consumption, density brings a host of other benefits simply by reducing travel time. This effect can be somewhat substituted by enhanced public transit. Consider 500k people in Seattle w/o any busses or rail; consider 500k people in Seattle with 3 times our current service.

“density drives up economic productivity” Yes, but this happens at all levels. The dry cleaner has more potential customers, as does the shoe shine guy, simply because of the proximity of more clients. Wages increase in dense environments across the board. This does leave the jobless behind, but that’s an issue that can’t be solved with housing prices.

“Building high-end or even middle-income units isn’t going to address low-end affordability.” Sure it is. Every additional home in a city means one more household can afford to live there. They don’t move into the shiny new places, they move into the places that the upwardly mobile just moved out of. Coincidentally, these older homes almost always used to be high-end or middle-income units.

“the increased costs of transportation are less than the decreased costs of housing” I think that’s a fair argument. Although people are extremely first-cost sensitive. A long-distance commuter can waste $500k, spread out over the life of a mortgage.

My first point was to suggest that density can actually drive up housing prices through means other than simply more purchasers chasing a fixed number of units, which Alex seems to imply as the only factor.

Regarding the second topic, I’m not so confident as you are that housing markets are as perfect or prices as elastic. While I certainly haven’t studied the economics of housing, it strikes me that housing markets would be quite clunky (unusually imperfect)—people are willing to live only in a limited number of neighborhoods and in limited type of units creating multiple sub-market ‘islands’. Plus, new units come online extremely slowly, and people are usually compelled to make a housing commitment within a fixed time window. The market for bottled beer would be quite opposite.

I’m a density proponent, but I am sensitive to two things within the dialogue. One is that density proponents seem heavily focused on the dense end of densification, which leads me to suspect a cultural dimension. The more important, though, is that I notice consistent echoes of Milton Friedman and the ‘free’ market theology that has brought us a long list of ills, including excessive energy consumption and sprawl. It feels quite completely wrong to hear density-enviros asking us to trust and to liberalize markets. But, as I said, I haven’t studied the housing market.

I don’t think we need a perfect market or rational actors to drop prices with increased supply. The only assumption we need to make is that we aren’t somehow driving up immigration from other areas*. Holding just that one variable constant, you know that an increase in housing will allow more households to live in the city. The details don’t matter at all – desirability of different neighborhoods, your sub-market islands, etc. Overall, if 300k households can afford to live here and you add another 1k homes, those thousand marginal non-resident households – those families that couldn’t quite justify the rent in Seattle – suddenly can move in. If they don’t, there are 1k vaccancies that drop prices until they do.

Great post. I wrote about the actual evidence for this in Seattle just last month, and this article goes really well with it. Mine is focused a little more on the relationships we’ve seen over the past 15 years between residential unit development, vacancy rates, and rent prices, and the case is very clearly made by the numbers. Check it out if you get a chance. http://betterinstitutions.blogspot.com/2012/09/increased-apartment-housing-in-seattle.html

1. To say that people criticizing urban renewal projects and the “density-is-best” discourse “misunderstand reality” is quite a demagogical statement and cannot serve to better our collective understanding of urban dynamics.

2. You give the example of San Francisco to serve as an illustration of the negative effects of “lack of new housing projects”. You could also look to Vancouver (British-Columbia) to serve as a contrary example. Densification is a prime policy objective of Vancouver and it has been accompanied by an outrageous increase in property values. Today, average housing-related costs per household are equal to 76% of household median income in Vancouver. You can imagine the impact this has on lower-income household who make under-median income.

3. Density in itself, seen in a vacuum, cannot be said to drive property values up or down. One needs to consider where density is being added, whether buildings are being replaced, whether we are talking of a green field or brown field development, etc. A very summary research in academic journals should be sufficient to convince you that most “urban renewal” projects are generally accompanied by gentrification trends to the detriment of present dwellers. Density is generally but one aspect of these projects whose aim is, more generally, to revitalize working class neighborhoods, to attract new dwellers, to pimp property tax revenues for municipalities, to create profitable sites of investment for real estate promoters and speculators, etc. The question should not be “Is density good or bad?”, but rather “In what CONTEXT is density desirable and in what context is it undesirable?”

4. You speak of the inevitable laws of capitalism while speaking of “supply and demand”. Another essential aspect of capitalism which we should consider is that of “speculation” or the absolute necessity of finding new sites of investment for capital, “accumulation for accumulation’s sake”. In this context, rising housing values is an absolute pre-requisite to urban densification. No investor would want to deal with the hassles of re-building city centers if he were not guaranteed that he would make a generous profit. No investor would embark in densification projects if housing values were to remain stable. In other words, if supply in housing increases, decreasing the long-term value of housing, investment in densification projects will naturally cease. You can thus imagine that this scenario will be fought against by real estate density promoters. If anything, rising housing values are driving the social acceptability of densification, at least on the part of city officials, promoters and bankers, and not the other way around. As such, densification does serve to bolster the continued increase in property values, which is actually an admitted objective of most municipalities (who often depend on property tax for financing).

5. Density should be understood, beyond sustainability, as being related to investment. If an investor is allowed to build more and more floors in a context of rising housing values, it is an excellent way for him to maximize his profit margin.

6. Density also calls for large scale real estate investment, “capital-intensive investment”. In a general context where the middle and working classes are loosing more and more purchasing power, to privilege capital-intensive investment in urban projects serves to bolster inequalities in wealth.

7. My personal conclusion is that we need to find ways in which we could drive up density (for all the environmental benefits that we agree on) and limit urban sprawl while also keeping city centers affordable and accessible to all. That means finding alternative ways to finance housing projects and urban renewal projects (ex: “bangruppen” in Germany, land trusts in San Francisco, “auto-promotion” in Strasbourg) where smaller investors can participate in the development of the city. It also means that we might have to start considering “housing” as an essential need which cannot be exposed to financial speculation.

Yes, there are many aspects of densification that serve to drive up prices. As Alex Steffen mentioned in his piece, density often brings benefits (in the form of walkability, viable transit, lower transportation and utility costs, urban aesthetics, a greater concentration of people instead of cars and surface parking lots) that result in greater demand.

It’s for this reason that you need to build that much more supply (density). Instead of building just enough supply to meet the demand at any particular point in time, anticipate that the density will indirectly increase demand as well. Saturate the market with excess supply – especially at the high end – to ensure that the remaining opportunities for developer profit lie at the middle and low end of the market.

Austin, specifically, needs to streamline development approval for housing with the right developers who meet certain criteria and have a track record of success and responsibility. Austin needs to stop asking developers to subsidize rents in the hopes that this will create a temporary pool of affordable housing. If our council and the Imaging Austin people had spent more time identiifying how to attract housing development to certain tracts of land in our city instead of focusing on an image of what utopia looks like, we would be well on our way to more housing. We need to embrace the coming building boom. Our city’s response to that will determine how affordable housing becomes. The more housing there is, the more affordable it si. Locking our city into a dependence on federal tax credits and a stream of tax money, be it local, state or federal, only increases our overall tax burdens. It does not have to be that way. But we have too many people in this city who think like that.

Supply Side, a new series addressing the interplay between development, regulations, housing supply, and affordability, and what it all means for creating the sustainable cities of the future. Or check out the C200 Series on why cities matter, and the S400 Series on solutions for cities.